Despite ending the year stronger than anticipated, the U.S. economy is still expected to slip into a modest recession in the first half of 2023, Fannie Mae’s Economic and Strategic Research (ESR) Group said Friday.
According to the ESR Group’s January 2023 commentary, the group forecasts that an eventual “retrenchment of the consumer” will be a major factor in the coming “economic contraction.”
The group predicts that fourth-quarter gross domestic product (GDP) growth for 2023 will be -0.6%, one-tenth lower than its previous forecast.
“Noting cooling inflationary pressure in the past three Consumer Price Index (CPI) reports, the ESR Group believes the Federal Reserve is likely nearing its eventual terminal (interest) rate, but notes that upside risk remains for tighter-for-longer monetary policy should a recession be delayed or avoided altogether, or, alternatively, if inflation measures fail to further cool.”
In addition, the ESR Group said it expects a cumulative 6.7% decline in home prices over the next two years, as housing affordability remains unsustainably stretched.
“A repeat of the Great Financial Crisis is not expected, however, as far fewer borrowers are facing interest rate shocks; loan workout and modification programs are more robust; and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-08 period,” the ESR Group said. “Instead, housing affordability is forecast to gradually improve over the longer term due to a combination of home-price declines, modestly lower mortgage rates, and stronger-than-usual nominal income growth.”
The group also said it expects sales of existing homes to remain constrained, due to the ongoing affordability challenges and the “lock-in effect” —- in which many current homeowners have mortgages with lower rates than are currently available — creating a path for the new home sales to outperform existing home sales in coming years.
“There are economic signals pointing to recession, but also signs that a ‘soft landing’ may be in the offing,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. “In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness.”The group also said it expects sales of existing homes to remain constrained, due to the ongoing affordability challenges and the “lock-in effect”
Duncan noted that while there are “limited and tentative signs” of a slowing labor market, labor remains robust overall.
“The market sees the Federal Reserve easing in the second half of the year, which can be interpreted either as a view that the recession is forthcoming or that the slowdown in inflation will lead to a less restrictive monetary posture,” he said. “If the latter occurs, the lower accompanying rates will likely set the stage for a pickup in housing activity going into 2024, as can be seen in our latest forecast.”
He also cautioned that, “if the market is wrong — and the Federal Reserve does as it has stated it will do and holds the federal funds target at the terminal rate longer to ensure no inflation resurgence — then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, we expect 2023 to be a slow year for the housing market.”
